The former chairman of MarkWest Energy Partners LP’s (NYSE: MWE) management company wants to scuttle a multibillion dollar merger between MarkWest and Marathon Petroleum Corp. (NYSE: MPC) and its MLP, MPLX LP (NYSE: MPLX).
John Fox, former CEO, chairman and director of MarkWest Energy GP LLC, which manages the MarkWest MLP, questioned why the MLP is selling itself for “pennies on the dollar.”
In July, Marathon and MPLX said they would purchase MarkWest Energy Partners for a deal then worth $15.7 billion.
Marathon and its MLP stand to increase raw earnings by nearly $1 billion. MarkWest is the second-largest gas producer in the U.S. and processes about 75% of total rich-gas production from the Marcellus and Utica.
The companies have said the combination will create a large-cap, diversified MLP with an expected compound annual distribution growth rate of 25% through 2017. However, Fox said that most of the proceeds will eventually end up in Marathon’s pocket.
Marathon spokesman Chuck Rice said the company is disappointed with the comments.
"We continue to believe the proposed combination is compelling and we look forward to the Dec. 1 vote and finalizing the combination of MPLX and MarkWest," Rice said. "We are very enthusiastic about the prospects for the combined partnership."
Under the terms of the deal, MWE common unitholders would receive 1.09 MPLX common units for each of their common units. Marathon would contribute $675 million in cash and its MLP would assume all of MarkWest’s cash and about $4.2 billion in outstanding debt.
MarkWest would also gain access to a portfolio of $1.6 billion in MLP-eligible EBITDA, the companies said. It would also own 71% of the merged company, followed by Marathon (21%) and MPLX (8%).
“The announcement is a clear positive to MPC shareholders,” Jeff Dietert, head of research, Simmons & Co. International, said in July.
Fox says the $675 million cash payment would be paid back to Marathon in less than three years through incentive distribution rights (IDR) to Marathon. Fox described the IDR as rights to payment of an increasing percentage of the cash distributed, and they are generally held by an MLP’s general partner.
“During the period from 2016-2019, Marathon Petroleum, as owner of MPLX GP, is projected to realize an estimated benefit of nearly $2 billion in cash from IDRs that would otherwise accrue to the limited partners of MarkWest were it to remain a stand-alone entity,” Fox said.
Not pulling any punches, Fox has launched the website, iamvotingno.com, which calls the merger a “bad deal” that will cut distributions to MarkWest unitholders by “an estimated 46% with only intent to get back to parity in three to five years.” Fox owns 1.4 million MarkWest common units.
Fox said the market has effectively judged the deal since its announcement: the unit price of MPLX has fallen 44% since the merger.
Fox, who in 1988 co-founded Denver’s MarkWest Hydrocarbon Inc.—now an MWE subsidiary—said the merger threatens to significantly reduce distributions to former MarkWest unitholders.
MarkWest is better off as a standalone. In a June presentation, the company noted that 90% of its 2015 net operating margin is fee-based.
“Beyond the obvious avoidance of a draconian distribution cut and the enormous IDR burden, a standalone MarkWest has a tremendous growth platform,” he said. “MarkWest is the largest gas processor in the prolific Marcellus/Utica gas field, processing about 60% of the total rich-gas production from this field.”
Analysts, however, still see promise for MarkWest through the merger.
On Sept. 15, Kristina Kazarian, analyst, Deutsche Bank, said the MPLX merger is MarkWest’s “next step to offer an even wider downstream menu for producers.”
The creation of in-basin demand for NGL in the Northeast is a key goal for MarkWest and will be a major focus for the $6 billion to $9 billion in incremental projects that the MPLX deal is expected to bring.
“We see further development around Cornerstone as a likely first announcement,” she said. “From a timing perspective, the deal is still in SEC review but appears on track for a mid-fourth quarter vote and end-fourth quarter close.”
Contact the author, Darren Barbee, at dbarbee@hartenergy.com.
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